Internet BS made from twisted headlines is fun to spread. But reality is a lot more interesting.
By Wolf Richter for WOLF STREET.
The social media and comment sections, including the illustrious WOLF STREET comments, are afire again with another headline, based on a headline in the Wall Street Journal that is being twisted, contorted, and spread by people who refused to even read the first paragraph. The meme is that PE firm Blackstone Group bought 17,000 houses for $6 billion, outbidding regular people, and thereby making it impossible for regular people to buy those houses amid a red-hot housing market.
Alas, what gorgeous ridiculous internet BS! Blackstone didn’t go around the US grabbing 17,000 houses, outbidding regular mom-and-pop buyers with its $6 billion war chest. On the contrary.
Blackstone bought an entire company, Home Partners of America, that already owned 17,000 single-family houses. Home Partners buys houses and rents them to tenants with an option to buy at a preset price at any time with 30 days’ notice – the company is “committed to making homeownership a reality for more people,” it says.
About 20% of the tenants have so far exercised the option to buy the house they’ve been renting, Kathleen McCarthy, global co-head of Blackstone Real Estate, told the Wall Street Journal. Given recent home price increases, for many current tenants the preset purchase price would likely be below the current market price, she said.
Blackstone Real Estate Income Trust, the fund that is buying Home Partners, invests across commercial real estate – multifamily, industrial, hotel, retail, and office – and with this acquisition is now moving into the super-hot segment of commercial real estate, single-family rentals.
This follows another internet horror story a few days ago of similarly gorgeous and irresistible allure, that went viral on Twitter and elsewhere, including in my inbox. It went something like this: “BlackRock is buying whole neighborhoods and is outbidding homebuyers by paying 20%-50% over asking price.”
This gorgeous internet BS also cited a WSJ article. Alas, the BS spreader, as is so often the case, never even read the article. Turns out, in the WSJ article, BlackRock was mentioned only once in passing at the end on some other topic. And the “buying a whole neighborhood” meme was in fact a corporate acquisition, between two companies.
What the WSJ article actually reported was that homebuilder D.R. Horton had built a subdivision of 124 “built-to-rent” houses in Conroe, a city near Houston, had found tenants for them, and then marketed the whole subdivision in December last year. Then a few days ago, the WSJ reported that the winning bid was $32 million by online property-investment platform, Fundrise LLC. Nope, not BlackRock.
The WSJ also reported that D.R. Horton had made a gross margin of up to 50% on selling that subdivision of rental properties, roughly twice the gross margin it gets from selling houses to regular homebuyers.
That’s perhaps where the ridiculous claim came from that BlackRock – which wasn’t even involved – overbid regular homebuyers by “paying 20%-50% above asking price.” Tsk, tsk, tsk.
Yup, those folks that got tangled up in reading headlines sure had a lot of fun getting angry about BlackRock driving out first-time homebuyers with this $32 million war chest.
But this sort of garbage being fabricated, contorted, and twisted out of unread articles and misinterpreted headlines obscures a huge structural change in the housing market and in commercial real estate: built-to-rent developments.
Built-to-rent has become a red-hot segment for homebuilders; a lot of money is flowing into these purpose-built rental properties. And it makes sense. These are brand-new houses marketed to renters. They’re nicely done but don’t have to offer the same quality finishes that a homebuyer expects when plunking down $400,000. I started discussing this built-to-rent trend last year, including in my podcast THE WOLF STREET REPORT in early October.
And rather than building one house here and one house there to be rented out, homebuilders are building whole subdivisions, find tenants, and then sell the entire subdivision to pension funds and other income investors.
Big institutional investors have always dominated the multi-family market – such as big apartment buildings.
But following the housing bust, with the encouragement of the Fed, PE firms moved into the single-family rental market in a big way, buying foreclosed houses from the banks. This started in late 2011. They bought for cents on the dollar, concentrating on a handful of the hardest hit big housing markets. Blackstone was the biggest force, and later spun off its creation, Invitation Homes, as a REIT to the public. It now rents out 80,000 houses.
Others of that generation include American Homes 4 Rent. They all followed the same route: buy existing houses out of foreclosure for cents on the dollar, rehab them if necessary, and rent them out.
What is happening today is different. Investors are buying in a red-hot housing market, paying sky-high prices, even as rents are a mixed bag, dropping sharply in some big markets, but surging in smaller markets, with the risk that drops and surges might reverse as working-from-home folks are being recalled to the office.
Investors of all kinds are very active in this housing market, now buying at prices that might make it tough to rent the properties out profitably. And as D.R. Horton has found out, they’re willing to pay an arm and a leg for a purpose-built development of rental properties.
There have been all kinds of big corporate deals recently in the single-family rental market.
American Homes 4 Rent is getting into the built-to-rent segment. It partnered with J.P. Morgan Asset Management to build $625 million worth of rental houses. Homebuilder Lennar got into a single-family rental deal with investment firms that include Centerbridge Partners and Allianz, to build over $4 billion worth of single-family rental houses.
These are new houses that are going to be added to the US housing stock. They will relieve some pressure on the housing market by offering folks an alternative to buying, and they will not compete with homebuyers; they will compete with other landlords for tenants.
Rockpoint Group LLC has invested big in single-family rental companies. Brookfield Asset Management acquired a controlling stake in Conrex, which owns over 10,000 single-family rental houses in the Midwest and Southeastern US.
Yet, big institutional investors still own only about 300,000 houses in the US, or about 2% of single-family rental market, according Amherst Pierpont Securities, cited by the Wall Street Journal. And 85% of the single-family rental houses are owned by small investors with 10 or fewer properties.
Single-family rentals have probably been around as long as single-family houses. What was new in 2011 and 2012 was the entry of big PE firms with huge amounts of money buying tens of thousands of homes out of foreclosure during the depth of the housing bust.
What is new now, nearly 10 years later, is that big sellers such as D.R. Horton are making massive profit margins selling built-to-rent development to institutional investors that are all chasing after yield in a yield-starved world, and they’re doing so by paying extraordinary prices in a red-hot market, hoping for massive rent increases to make this work.
A whole industry has cropped up around single-family rentals in a veritable feeding frenzy amid red-hot home price spikes that make the whole rental-business model financially much more difficult to pull off for buyers at current prices.
And for renters, well, all those new entrants into the rental market should give them more choices in what they want to rent, and a little more bargaining power when the landlord tries to hike the rent.
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